Brokers, bureaucrats and the emergence of financial markets

When managers wish to raise external capital, investors must be able to trust that brokers and managers will not cheat them out of their money. To what extent is government regulation necessary for the existence of advanced financial transactions and, for that matter, the well functioning of markets in general? A growing literature argues that strong state enforcement is needed to foster financial markets (La Porta et al, 1997, Glaeser et al, 2001). The problem of contractual performance and, more generally, the problem of social order are some of the most enduring questions in the social sciences. German sociologist Georg Simmel may have put it most eloquently in his 1910 essay when he asked, “How is Society Possible?” but the question is rooted in a discourse dating back at least to Thomas Hobbes’s (1651) Leviathan. Hobbes contended that social order was impossible without external enforcement, and in a similar manner many modern commentators in law and finance maintain that the state must play an active role for markets to function. In his study of emerging financial markets in post‐Soviet Russia, Timothy Frye (2000:2) argues that, “politics underpins social order”.